The hidden volatility of monthly pay
This paper by Peter Ganong, Pascal Noel, Christina Patterson, Joseph S. Vavra, and Alexander Weinberg examines monthly earnings volatility among U.S. workers using high-frequency administrative data from payroll processors and bank accounts. The research reveals that traditional annual income studies have masked significant month-to-month pay fluctuations within ongoing employment relationships.
Key methodology
The authors utilized two primary datasets spanning 2010-2023: administrative earnings records from a U.S. payroll processor covering 2-4 million workers, and bank account data from JPMorgan Chase Institute. The analysis focused on monthly earnings volatility within continuing employment relationships, excluding volatility from job transitions or unemployment. They measured earnings instability using percent changes in pay per paycheck and employed various empirical strategies including fixed effects specifications with job movers and instrumental variables approaches.
Findings
- Pervasive earnings volatility: Workers experience substantial monthly pay fluctuations even within stable employment. In approximately 75% of months, workers receive different pay amounts than the previous month, with a median change of 5% and 25% of months showing changes of at least 17%.
- Stark differences by employment type: The most significant finding concerns the divergence between hourly and salaried workers. Hourly workers (60% of the U.S. workforce) experience earnings changes in 92% of months with a median absolute change of 9%, while salaried workers have much more stable pay with a median change of zero. For hourly workers, this volatility stems primarily from fluctuations in hours worked rather than wage changes.
- Income and volatility relationship: Lower-income workers face substantially higher earnings volatility, primarily because they are more likely to work in hourly positions. This creates a troubling dynamic where the most financially vulnerable workers also experience the greatest pay instability.
- Firm-driven nature: Using job mover analyses, the authors found that approximately half of typical worker volatility stems from firm-level factors, including fluctuations in total firm hours and scheduling practices. This challenges assumptions that volatility primarily reflects worker preferences.
- Welfare implications: The authors provide compelling evidence that monthly earnings instability imposes significant welfare costs on workers. Using bank account data, Ganong et al. demonstrated that income volatility causes consumption volatility and leads workers to quit high-volatility jobs more frequently. Their calculations suggest that a typical hourly worker would sacrifice 4-11% of their income to achieve the earnings stability of salaried workers.
Earnings Instability
Authors: Peter Ganong, Pascal Noel, Christina Patterson, Joseph S. Vavra, Alexander Weinberg
From: University of Chicago
